Indian companies looking to list in London - Insider view from a reporting accountant

Tuesday, October 12, 2010 | Posted by: Grant Thornton
Categories: India, India Watch Issue 10 | Tags: India, finance, economy, governance, India Watch, risk, South Asia, IFRS, stockmarket, IPO market, IPO, London listing, Hemal Shah, GAAP

After a sustained period of Indian IPO activity in London in 2007 and 2008, predictably 2009 and 2010 have seen a significant reduction in new admissions. As sentiment picks up with the global economic recovery, we are seeing positive signs that India Inc. is once again ready to seek IPO opportunities in London with i-Energizer and SKIL Ports & Logistics having successfully completed admissions to AIM in September and October 2010 respectively.

Being the pre-eminent advisor to Indian companies listing on AIM, we have experienced the delights and pressures of advising Indian companies for real.  Also we are often the only advisors working on the ground in India with experience of a listing process, understanding of the roles of various parties and key IPO considerations and have therefore been a key point of contact and information for management and stakeholders of our clients and for other advisors. 

The common challenges that aspiring Indian companies need to watch out for from a reporting accountant viewpoint are covered below.

• There are significant differences between IFRS and Indian GAAP and IFRS disclosure requirements are more onerous so early preparation is important as this area generally creates the highest tension on IPO timetables. Also experience has suggested companies need to engage suitably qualified local accountants who have IFRS experience and ensure their systems adequately capture all the data needed for extensive IFRS disclosures - this can be problematic in relation to prior years
• Our Indian experience allows us to say that Indian companies embrace one aspect of the long form report as it takes a long time to get this one done!  This historical due diligence report is extensive and aimed at highlighting risks the company faces - minimising time spent on the long form report by releasing information promptly and fully helps with timetables.  It also takes a while to convince Indian management that their businesses have any risks!
• Indian IPOs often require reporting accountants to re-audit all the historical financial information as we are often not allowed access to predecessor auditor working papers.  This stretches the finance teams and invariably impacts timetable
• Historical changes in group structures and pre-deal corporate structuring requirements impact the scope of reporting accountant work and therefore ideally need to be planned well ahead of an IPO.  Also companies are best placed to keep it simple in the run-up to the IPO as frequent restructurings hinder the ability to report on a stable core business in the due diligence reports and in the Admission Document
• Related party transactions (frequently seen in Indian companies) require transparent disclosure and often need extensive explanation to put them into perspective such that these disclosures often represent the longest notes to the historical financial information on Indian IPO documents.  Aspiring IPO candidates are advised to keep it simple and avoid routing any unnecessary related party transactions through the proposed IPO companies as this often creates unnecessary complexity and diverts management and advisor focus away from the more important financial and commercial issues  
• The failures of Enron, Worldcom and, closer to home, Satyam have put the spotlight on public company governance, systems and processes.  From an IPO perspective, reporting accountants are required to provide comfort on the adequacy of a company’s financial reporting procedures.  As the legacy systems and controls are designed for privately controlled and managed businesses, it is critical to recognise that life as a public company is very different with the presence of external stakeholders and the need for compliance with regulations.  Accordingly, companies need to look inwards and implement remedial actions to improve controls and processes as part of the pre-IPO grooming process - in some cases a hard look is required as the existing IT systems and reporting timelines are not appropriate and responsive to the burdens of a stricter reporting regime
• We have come across numerous finance directors on Indian IPO transactions being pulled in all directions by all advisors and clearly they have the day jobs to do.  The smoothest IPOs, Indian or otherwise, involve companies with a good management structure that is not reliant on some key individuals and where responsibility for the IPO process is spread around the management team
• Transparency accelerates the due diligence process and our experience suggests there is a real cultural difference here and it takes a while to get information flowing smoothly - in an IPO environment, it is important that companies build trust with advisors quickly and share critical information promptly and freely
• Forecasting processes should be implemented pre-IPO to demonstrate forecasting history. Also, companies need to delicately balance aspiration and reality as it is critical that IPO companies meet forecasts to gain credibility with the Nomads and investors.  And please let the reporting accountant run some sensitivities - all forecasts have some degree of vulnerability and it is a good thing if your forecasts can withstand stress-testing scenarios as it validates the robustness of the business plan

So the reporting accountant’s message is simple - do not underestimate the work involved, plan ahead and work with and trust your advisers and you will find the reporting accountant aspect of your IPO very smooth.

Hemal Shah
Associate Director, Corporate Finance
For Grant Thornton UK LLP

Mahad Naranayamoni  
Transaction Advisory Services
Grant Thornton India

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